Strategic Analysis of Kroger Co.

Eric Cox
Ohio University

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Table of Contents
Executive Summary 1
U.S. Grocery Store Industry Analysis 2
U.S. Grocery Store Five Forces Analysis 3-6
Key Success Factors 6
Company Analysis for The Kroger Co. 6-9
Strategic Issues 10
Recommendations 11
Appendices 12-13
Executive Summary
Kroger currently operates in a highly fragmented and mature industry. As a result, Kroger and its competitors fiercely compete for the consumer’s dollar in an increasingly competitive retailing sector. Due to the similarity of the goods sold at supermarkets, industry participants compete on price by offering discounted prices through sales and policies such as price matching. Kroger and its competitors rely on a large volume of sales with low markups and offer generic or private label food items, which are inexpensive substitutes for branded products, to drive sales. Kroger and its competitors will usually offer weekly savings on popular products to attract new customers (Guattery, 2017).

Kroger’s current strategy is different from its previous years, due to its decline in annual sales growth first seen in 2015 (Watkins, 2017). The company is now emphasizing self-development, allocating resources towards the development of its digital strategy and the implementation of new strategies in order to grow in a mature market. Kroger has found success in growing in the industry by merging with other businesses. The most recent merger being ModernHEALTH which took place in early 2015. Kroger’s numerous convenience stores generate around 20 percent of its revenue (Gledhill, 2017). However, Kroger intends to sell off these stores using the Restock Kroger plan. This plan will go into fruition sometime in 2018 and is due to the company’s vision of the future (The Kroger Co., 2017). The company currently operates 37 food production plants, primarily bakeries and dairies, which supply approximately 33 percent of Kroger’s private label units and 44 percent of the grocery units sold in the company’s supermarkets (Gledhill, 2017).

The key strategic issue Kroger must address is how to grow its business in a mature and fragmented industry. With current operators constantly competing for a price advantage, Kroger must find ways to marginally improve its profits, which can lead to growth in the long run. A brief summary of the recommendation proposed at the end of the report suggests that Kroger should implement more automation in its operations. This suggestion is the result of forces that impact not only factors that affect the industry but also key success factors that Kroger must take into consideration moving forward into developing into a more digitalized service.
US Grocery Store Industry Analysis
This section will provide an overview for the United States Grocery Store Industry as well as some trends that the industry follows. According to Guattery (2017), the grocery store industry makes up the largest food retail channel in the United States. Companies in this industry specialize in providing various lines of food products. Some companies however, offer more than just food products such as, cooking utensils, cleaning supplies, drugs and health products. The industry is highly fragmented and as such, Kroger Co.(“Kroger”), Albertsons Companies LLC, Publix Super Markets Inc., Meijer Inc., Whole Foods Market Inc., and more compete in many different regions inside the United States. While some companies thrive regionally, it is difficult for any one company to gain a significant amount of the national market to completely influence the grocery store industry’s direction.

The industry is mature and has grown over the last few years and has benefitted from the rising economy. Consumers’ increased disposable income allowed for a shift to premium, all-natural, and organic brands of food. This helps increase the revenues for the industry totaling above $600 billion. The industry is expected to grow 1.1 percent annually for the next five years to approximately $640 billion (Guattery, 2017).

The grocery shopping landscape has been changing due to multiple trends in the industry. According to Peterson (2014), a single store used to be able to serve all of shoppers’ food and beverage requirements in the past but currently, consumers purchase their grocery needs from across more than a dozen retailers. Most consumers shop at more than one store in order to fulfill their grocery needs. This shopping trend is not due to the lack of availability of a single store but most consumers find that few stores offer the specific product mix of value, quality, and private label brands that an individual may be looking for.

Another trend that influences the industry is the rise in popularity of private labels. Due to the recession, private labels were heavily favored for being a typically cheaper substitute for brand name grocery products. Not only were the products less expensive but some consumers enjoy the quality that store brands offer. Companies that succeed in providing these goods can have the benefit of customers buying said products at their store, rather than industry at competitors such as convenience stores and local markets.

Companies are also scaling back stores and focusing them to suit specific customers’ needs. This is due to the customers’ desire for more product curation. As a result, more and more companies are expanding smaller format stores such as Kroger’s store, Turkey Hill Market. Online grocery sites have web tools to curate products by recommending goods based on a customer’s previous purchases, viewing history, recipes, and more. Online grocery shopping has thrived because of this and more and more companies are finding ways to implement a quick and convenient online shopping experience.

One more trend that Peterson (2014) has brought to attention was that the availability of fresh products impacts the decision of where consumers prefer to shop. Knowing this, companies that are efficient in providing fresh produce, meat, poultry, seafood, and more will benefit by gaining customer preference and potentially gain more sales.

U.S. Grocery Store Five Forces Analysis
This section of the report will utilize a Porter’s Five Forces analysis to identify if the United States Grocery Store industry is attractive or not and to determine if the industry has potential profitability and room for growth.

Rivalry among the Existing Players
Competitive rivalry in this industry is considerably high for multiple reasons. For one, as stated above, the U.S. Grocery Store Industry is highly fragmented. As a result, operators compete on value, service and locations in order to maintain profitability. The Grocery store industry consists of many well-known company chains such as, Kroger, Walmart, ALDI U.S., Meijer, Trader Joes, Whole Foods, Publix, and Albertsons Companies. While no single company completely dominates in terms of market share (see Appendix A), the top three include Kroger leading at 15.8 percent market share, Albertsons Companies LLC following at 9.9 percent, and Publix Super Markets Inc at 5.7 percent (Guattery, 2017). Other companies in this industry individually hold a market share of less than five percent and combined cover the remaining 68.6 percent of the market share. As previously stated, it is difficult for a single company to obtain a substantial share of the national market in order to directly control industry trends.
However, it is possible for companies to obtain a significant enough share to lead regionally and influence trends in specific regions and cities. Because of this, it is possible for well-known company chains to drive out smaller stores by aggressively cutting prices and developing high-impact marketing campaigns thus creating difficult obstacles for smaller or local stores. Whereas a powerful chain such as Kroger may be able to maintain itself after cutting prices; a local store may struggle with keeping up operational costs and eventually drop out of the market. As a result, it is vital that competitors, large or small, provide higher quality products, higher levels of customer service, and also greater convenience in order to build enough customer loyalty and to be able to remain competitive in the long run.

Threat of New Entrants
The threat of new entry into the grocery store industry is moderate and rising. There is no direct license required to operate a grocery store, so new entrants have one less barrier to entry to concern themselves with (Guattery, 2017). However, the initial capital required is high as new entrants would need to purchase land and build a new store or lease a building; both increasing barriers to entry. New entrants will also have to take into consideration an installation of a point of sale system to manage transactions between the business and its customers. In addition, purchases for goods and employee wages will sum up to be a major cost of operating a grocery store at approximately 85 percent of revenues of the industry in 2017 (Guattery, 2017). Considering purchases alone cost 75 percent of industry revenues, a new entrant will need to excel at finding proper suppliers to conduct business. Because distribution networks between incumbents and suppliers already exist, it can be a barrier to entry.

Since relationships between suppliers and operating businesses have been established, some larger incumbents can enjoy supply side economies of scale where they can command better terms from suppliers and also allocate their fixed costs across multiple units (Porter, 2008). Also, leading retailers have already locked in supply bases for certain produce and other fresh food products and consequently, new entrants will not be able to access such resources. These factors can further increase barriers to entry because it forces new entrants to either accept a cost disadvantage or attempt to initially produce at the same scale as other large incumbents do and attempt to disrupt entrenched competitors (Porter, 2008). However, since the industry is highly fragmented, if new entrants can specialize in a specific product category relating to the grocery industry, such as offering all-natural products, a new entrant may find it less difficult to find an appropriate vendor to make its purchases through and potentially enter the industry successfully.

Bargaining Power of Suppliers
The bargaining power of suppliers in the industry is moderate. There are a few factors that suggest low supplier power. One factor that gives current operators power over their suppliers is the use of slotting fees. Slotting fees are a fee paid by a vendor or manufacturer to a retailing establishment in exchange for making a room for the vendor’s product on the retailers’ shelves and warehouse. Slotting fees also cover costs for products to be registered in the retailers’ data system and for the system to recognize the products’ bar code for use in transactions. Slotting fees lower the bargaining power of suppliers because retailers are constantly approached by suppliers to add new products. In the process of adding new products suppliers must convince the retailer to remove an existing product that is not successful or to create new space within a retailers’ shelves (Federal Trade Commission, 2003). The risk of a supplier losing its business with large operators leads to negotiations that favor the large operators. This, in turn, contributes to lowering the bargaining power of suppliers.
There are however, opportunities for suppliers to raise their bargaining power. For example, some operators, such as Walmart and Whole Foods, do not engage in charging slotting fees. In addition, if a supplier successfully engages in a forward integration strategy such as selling its products online instead of through a retailer, it can decrease its reliance on larger operators. Suppliers can also raise their bargaining power when negotiating with stores that offer mainly specialized products, such as all-natural, gluten free and many others. This is because suppliers can charge premiums for such products and for stores that depend these, it is difficult to secure discounts on these types of products. According to Porter (1979), one way a supplier gains power if it “poses a credible threat of integrating forward into the industry’s business.” Porter (1979) also states that if a supplier’s “product is unique or differentiated” it can increase the power of suppliers. In these situations, higher bargaining power can allow for suppliers to extract higher prices from retailers and lower the overall profitability of certain grocery stores.

Bargaining Power of Buyers
The bargaining power of buyers in the grocery store industry is high. Buyers want to buy the best offerings available at the lowest price possible. Buyers have more power if they can always find an equivalent product and play one vendor against another. The power of buyers also increases when there are few switching costs associated with changing vendors (Porter, 2008). In the grocery store industry consumers are often comparison shopping whether it be online or looking at advertisements sent in local papers. Many operators try to appeal to price sensitive consumers. For example, Walmart has a price matching policy in place for consumers to actively compare prices. Other operators use coupons and sales to allure consumers to their store rather than competitors. However, these efforts made buy operators to boost customer loyalty and retention rates decrease profit margins for the industry (Guattery, 2017).

As said above, another way buyers have more power in an industry is if the products are the same. This increases buyer power because it allows them to find different outlets to find the goods they need. With the rise of technology and the internet shopping, buyers can make grocery related purchases online in the comfort of their own home. For example, through the services of Amazon’s Prime Pantry a prime member can order groceries on the website and then have it delivered right to their home. This comes with a delivery fee however, it shows that buyers not only have influence on prices but they also have the freedom of choosing the location in which they conduct their business. In response to the development of online shopping, the industry has seen competitors following a similar suit. Kroger for example, developed an app that allows its customers to buy all of their groceries online and schedule a time for pickup. Once the customer arrives at the designated location and parking spot, a Kroger employee will come outside and pack the customers vehicle for them. These developments made by major competitors show how much power a buyer has in influencing decisions made by the current operators. These developments tailored for the buyer ultimately leave firms in this industry with only modest returns (Porter 1985).

Threat of Substitutes
The threat of substitutes is moderate in the grocery store industry. Substitutes for the grocery store industry include convenience stores, local farmers markets, membership only warehouse retailers, online retailers such as Amazon, and dollar stores. Since the products offered in the industry are relatively the same, there is little to stop a consumer from switching from one vendor to another. For instance, Walmart’s private label Great Value offers products that are not significantly different from Kroger’s own private label offerings. In addition, most competitors also offer relatively similar brand name products and can be found almost anywhere at the same prices. However, this trend is mostly due to the threat of another supermarket joining local competition. For example, if there is a town where the main competitors in the grocery store industry sector are Meijer and Giant Eagle, the news of a Walmart entering the competition would be a huge threat. On average, competitors’ response to an entry of a Walmart would be a price reduction of around 1 percent. The response to other well-known chains such as Kroger would be half of the price reduction above (Basker, 2009). A response like this explains that the threat of substitutes is relatively high. As stated previously, consumers have many freedoms in where they shop and choose where they shop based on preference. For instance, if a customer enjoys buying their groceries in bulk and at a discount, they will most likely purchase a membership at a warehouse retailer such as Sam’s Club or Costco. Customers who buy from these retailers realize that if they wanted for example, 20 pounds of beef, they can buy it in bulk at discounted prices compared to going to a traditional grocery store like Meijer and trying to buy the same 20 individual pounds of beef with no discount but at similar quality.

Another example is if a customer buys most of their groceries daily instead of buying for the week and seeks lower prices in exchange for lower quality. In this case, consumers can choose to shop at a conveniently placed dollar store instead of a traditional grocery store. These types of substitutes can be a significant threat to the industry and lead to decreased profitability and potential growth (Porter, 2008). However, most traditional grocery stores offer a diverse selection of products and services that satisfy different customer needs to compete with industry substitutes. For example, for price conscious consumers, traditional grocery stores usually carry “value” products on its shelves to compete with dollar stores and other similar vendors. Success in offering the products that lower the threat of substitutes to the industry can potentially raise profitability for the industry.

Key Success Factors
Some key success factors of the grocery store industry include proximity to key markets, the ability to control stock on hand, a flexible workforce, monitoring the competition, and access to new and efficient technology and techniques (Guattery, 2017). A store’s proximity to heavily populated areas enables operators to maximize potential sales. A store that is easy to access, has clear brand recognition through clear signs, and appropriate parking space is more likely to attract customers in comparison to a store that does not take the time to strategically plan its location. Grocery stores can serve its customers more efficiently if it has a flexible staff willing to properly manage inventory and willing to rotate around the schedule especially during holidays and sales. Operators in the industry can benefit by taking advantage of new technologies such as new point of sale processors to increase productivity. Operators can also implement new techniques such as developing user-friendly apps that provide more convenience for their customers. Stores that successfully implement these factors in resourceful ways can increase their service offerings to their customers and have potential to increase their profits.

Conclusion of Five Forces Analysis
After applying the five forces to the grocery store industry, it is concluded that the industry is not currently too attractive for new entrants. This is due to the large amounts of capital required initially and the maturity of the industry. For incumbents, the industry can be attractive if they can successfully compete with other operators on price, location, and services provided. The industry can be profitable if it operators can form healthy relationships with suppliers and market successfully towards buyers that have a large amount of freedom to choose who they conduct business with respectively. It is also important that businesses find ways to improve their service offerings and properly manage inventory to remain profitable in this industry.

Company Analysis for The Kroger Co.

This section of the report will conduct a company analysis for The Kroger Co. (The “Company” or “Kroger”). The analysis will focus in on Kroger’s current operations and capabilities. The analysis will also highlight Kroger’s competitive standing in the industry as well as factors that impact the company. After analyzing the factors that impact the operations of the company, the report will cover some key strategic issues Kroger faces and list recommendations on how to alleviate the issues.

Overview of Kroger
Cincinnati-based Kroger was founded in 1883 and incorporated in 1902. In 2016 Kroger was one of the largest retailers in the world based on annual sales and as of 2018 it still is. (See Appendix B) The company also manufactures and processes some of the food for sale in its supermarkets (The Kroger Co., 2018). The company makes its revenues through customer transactions via its stores, fuel centers, and its online platforms. Currently Kroger operates 2,782 supermarkets in 35 states in the United States of which, 81.5 percent of supermarkets contain a pharmacy and around 53 percent of markets have a fueling centers for convenience. Kroger currently employs around 499,000 full-time and part-time employees (The Kroger Co., 2018). Kroger’s key markets are in Ohio, Georgia, California, and Texas. The company’s profits have been rising over the past few years due to new store openings, acquisitions, and steady increases in same-store sales revenue and in 2017, its sales increased by 5 percent to $115.3 billion (Gledhill, 2017).

Factors that Impact Kroger’s Business(PESTEL)
As with any company there are factors that impact the macro environment of Kroger. Analyzing these factors will help identify major opportunities and potential threats that Kroger faces and will help explain the reasoning behind some of Kroger’s decisions (Ketchen, 2015).

There are many political factors that impact Kroger and other grocery stores. As stated in the industry analysis, employee wages are a major cost to the business. As such, a change in wage legislation could increase or decrease costs to the company depending on the outcome of the legislation. Another political factor that could impact the company would be pricing regulations. Since Kroger competes with other grocery stores on price, if there are regulations as to how high or low certain products can be priced legally then it can have a significant impact on the profitability of these products and overall profits attained from them.

Some economic factors make significant impacts on Kroger as well. Factors such as discretionary income, the inflation rate, unemployment rate, aggregate demand, and interest rates all impact Kroger. For example, the interest rate paid on the $3.5 billion of debt used to operate the company makes a significant difference on Kroger’s contractual obligations whether its 4 percent or 2 percent (The Kroger Co., 2018). Another economic factor that impacts Kroger is the cost of fuel. Increased fuel prices could have a negative effect on consumer spending towards fuel and increase Kroger’s cost of supplying fuel in its locations that offer a fuel center.

Social factors impact the culture of Kroger and its environment. The beliefs and attitudes of the population will have a role in how Kroger’s marketers understand its customers and how marketers tailor information to design advertisements to appeal to Kroger’s target market. For example, health conscious consumers have a demand for fresh produce and all-natural products. Using this information, Kroger can seek to stock its stores with products that satisfy the needs of these customers. Another social factor to take in consideration is the increased notion of environmental consciousness. Some customers enjoy products that do not harm certain aspects of the biological environment. For example, customers that identify as vegans could play a significant role in Kroger’s operations. If a large enough following for vegan diets occurred, Kroger would have to focus on acquiring products that qualify as vegan products. This could increase costs for the company but also open opportunities to charge premiums for said products.

Technology also plays a role in how Kroger conducts business. As stated previously, the development of online shopping and mobile apps impacts Kroger’s strategy on appealing to customers. With more and more consumers enjoying the luxury of shopping online, Kroger is looking for ways to increase its home delivery services available to customers (The Kroger Co., 2018). Improvements to technology can lead to better data that Kroger can use to conduct more efficient research. Using this, Kroger can develop ways add to their service offerings and may become more attractive to consumers.

Another major factor that affects Kroger’s business is the environment. Many of Kroger’s stores as well as its suppliers are located in areas that are susceptible to hurricanes, tornadoes, floods, droughts and earthquakes. Weather conditions and natural disasters could disrupt the company’s operations, interrupt the delivery of products to its stores, significantly increase the cost of products (The Kroger Co., 2018).

Lastly, there are legal factors that have an impact on Kroger. For instance, since Kroger provides a fueling station any laws pertaining to increased regulation of fuel due to concern of the effects of emissions could lead to a decrease in profitability for Kroger’s fueling centers. Kroger must also comply with various other government regulations such as health and sanitation standards, food labeling and safety, licensing for the sale of food, drugs and alcoholic beverages. Kroger will also have to comply with any recalls or discontinuations issued by the Food and Drug Administration. Government regulations such as these increase Kroger’s cost of operating its business (The Kroger Co., 2018).

Kroger’s Current Operations
Kroger currently operates a wide variety of store formats. As previously stated, roughly 53 percent of its supermarket and multi-department stores have a fuel center. Its combination of food and pharmacy stores account for 81.5 percent of total stores, followed by other store varieties such as price-impact warehouse stores that account for the remaining sum of total stores (Gledhill, 2017).

The company’s 150 Marketplace stores, which trade under the Dillon’s, Fry’s, Kroger, and Smith’s banners, capitalize on Fred Meyer’s general merchandise expertise. While similar to multi-department stores, Marketplace stores are generally smaller and don’t stock apparel. Kroger’s 130 price-impact warehouse-style stores operate under the Food 4 Less and Foods Co. banners and cater to the low-cost shopping for grocery, health and beauty care items. (Gledhill, 2017)
Kroger’s numerous convenience stores generate around 20 percent of its revenue (Gledhill, 2017). The company currently operates 37 food production plants, primarily bakeries and dairies, which supply approximately 33 percent of Kroger’s private label units and 44 percent of the grocery units sold in the company’s supermarkets. The remaining items are produced to Kroger’s strict specifications by outside manufacturers (The Kroger Co., 2018). Kroger’s supermarkets typically stock more than 14,000 of its own-brand products (under the Kroger, Ralphs, Fred Meyer, King Soopers, and other brands). Kroger is also considered a major pharmacy operator in the United States, however its pharmaceutical services only account for 10 percent of its total revenue (Gledhill, 2017). Kroger’s current operations are consistent with the analysis of the industry as a whole. Kroger is profitable because it offers services and products that are attractive to the industry’s consumers.

Competition
Some of Kroger’s top competitors are Walmart, Target Corporation (“Target”), and Costco Wholesale (“Costco”). Kroger has remained a strong company in the past few years. It has held a competitive advantage in areas such as providing organic foods and its use of data analysis. However, Kroger’s competitive advantages are not as powerful as they once were, evidenced by recent declines in same store sales (Watkins, 2017). Because of this, Kroger must compete more on price than it was previously. In the past few years Kroger has seen success in its customer service and product selection. But, with competitors constantly improving the quality of their own stores Kroger’s advantage on product selection has decreased in more recent time. Another advantage that Kroger had over its competitors was its customer service, however with the rise in online shopping customers are more concerned about convenience. Since some competitors such as Amazon have already dominated the United States market for online shopping. Kroger has lost its potential to gain a first mover advantage into the online grocery business. At this point it is important that Kroger finds ways to gain a significant price advantage in the market and if the company plans to succeed online, it will have to master convenience as well. As stated above, Kroger is finding ways to adapt to the rise in online shoppers through the use of its website and its mobile app. The company’s strategies for attracting customers to shop through its online channels is evolving and needs to continue to do so in order to compete with other online retailers in the industry.

Walmart is the world’s largest retailer and grocery chain by sales, as well as the third largest employer worldwide. The company leverages its size to exert high buying power over its suppliers, meaning it can obtain significant cost savings and pass them down to consumers with heavily discounted prices. These strategies have helped Walmart earn sales of around $485 billion in 2017 compared to Kroger’s $115 billion (Gledhill, 2017) making it the number-one seller of groceries. Although the majority of Walmart’s revenue is generated from its supercenter stores, industry-relevant revenue is generated through the Walmart’s Neighborhood Markets, a chain of smaller grocery stores launched in 1998. The industry-relevant revenues account for only 1.9 percent of the total market share (see Appendix A). Neighborhood Markets are smaller than Walmart’s standard supercenters and include pharmacies, liquor stores, delis, bakeries and photo shops. In 2016, the Walmart launched its first fuel and pick up location which enables consumers to order groceries online and pick them up the same day. The launch is a strategic move to keep up with the industry trend of online shopping (Guattery, 2017).
Strategic Issues and Opportunities
Strategic Issues
One issue Kroger has to face is its sensitivity to price variations for produce. Grocery prices plunged in May of 2016 according to official statistics (Kalogeropoulos, 2016), with eggs, dairy, beef, pork, poultry, and fish categories all posting declines in price. Fruits and vegetables price higher, but overall, the same basket of goods at a supermarket costs shoppers 0.7% less year over year. Kroger cannot do much to contest shifts in price and this specific issue caused Kroger’s sales growth to drop from 5.4 percent in 2015 to 2.4 percent in 2016 (Kalogeropoulos, 2016). While Kroger faced a decrease in sales growth that year its main competitors Costco and Walmart faced a different result. Costco’s sales growth only fell by 1 percent in 2016 while Walmart’s sales growth actually rose from .6 percent to 1 percent. The outcome of the price variations in groceries differs in this case because Walmart and Costco do not rely on groceries as heavily as Kroger does (Kalogeropoulos, 2016). Both of these competitors offer different products than Kroger such as, electronics, house supplies, and appliances. Product diversity such as these allows competitors to be less sensitive to price variations in essential produce products. Kroger would be wise to keep a look out for opportunities to not only diversify their service offerings, which the company does successfully, but to also incorporate ways to diversify its products to keep its sensitivity to price changes as low as possible, so that sales growth can remain more consistent during negative changes.

Another key issue Kroger has to face is finding ways to grow its business in a mature industry. As stated in the industry analysis current operators undergo fierce competition for price advantages. The industry also has established relationships formed between large incumbents and suppliers. For example, Walmart is able to turn negotiations with its suppliers towards its favor due to the amount of sales it brings in for the supplier. Walmart’s relationships with numerous suppliers may lead to Walmart gaining a cost advantage. This can pose a threat to Kroger if it wants to enter new markets. In this case it would be useful for Kroger to use data analysis in order to see which market (electronics, appliances, etc.) would the most efficient to enter. As a In order to grow in the long term, Kroger has decided to eventually sell its convenience stores through its Restock Kroger plan (The Kroger Co., 2018).
Another key strategic issue that an analysis of the industry and company has revealed is the issue of wages. As stated previously, Kroger employs well over 400,000 employees. The industry analysis has shown that wages constitute the second-largest cost segment for the industry at approximately 10 percent in 2017 (Guattery, 2017). Knowing that the industry operates on low margins, adding more and more employees can be costly for Kroger. Analyzing the key success factors will show that in order to efficiently operate, Kroger must find employees that are flexible during tight schedules and those that can properly manage inventories. In order to more efficiently operate in the industry Kroger should look for opportunities to lower their costs of wages while also finding proper employees.

Recommendations
For the first issue, Kroger finds itself susceptible to price changes in produce. This is due to the fact that operators in the industry purchase large quantities of goods. These purchases are responsible for approximately 75 percent of total costs (Guattery, 2017). Since Kroger depends heavily on its purchases, it is important that it diversifies its purchases in order to minimize risks the industry faces. As a recommendation Kroger should quickly identify markets that can be profitable to its business. The market must not be exposed to the same risk as the produce that was purchased. As a recommendation Kroger should consider adding an electronics department to add to its product and service offerings. Kroger is already planning on selling its convenience stores with its Restock Kroger plan to cater more towards its vision of the future. Kroger has already started on increasing its technological capabilities and offerings (The Kroger Co., 2018) so it would be reasonable to get started on selling technologies as well. Not only would the risks associated with its purchases be diversified but this decision could also make Kroger more attractive to its target market moving forward. This recommendation could also be used to help Kroger find growth in such a mature industry; the second strategic issue.

The last recommendation that Kroger should focus more on is to implement more automation. As stated above wages accumulate significant costs for the industry. Using the revenues from Kroger’s Restock Kroger plan, the company can allocate resources from the outcome of the plan in order to conduct research and development of automation. It is recommended that the automation be used for inventory management since machines can keep track of the thousands of products Kroger keeps on hand. There are already systems in place that help current employees manage inventories on floor. However, this recommendation is looking for towards the future and suggesting full automation for these processes. The reasoning for this is backed once again because of Kroger’s plan to build towards the future. If the company sells all of it convenience stores there will be job losses. Moreover, there will be opportunities for new positions in Kroger’s new plans of operation. In this case in order to save on wages in the long run Kroger should find ways to implement close to full automation at inventory stock management. This will still require manual overseeing of the automated processes but also reduce the risk of human error and could lead to reduced costs in the long run. If Kroger truly plans towards stepping into the future of a more digitalized service (The Kroger Co., 2018), then it should start with how it manages the products it offers its customers.

Conclusion
In summary, Kroger is recommended to increase its technological capabilities by one diversifying its current product offerings, and more importantly taking steps further into automation to push towards the upcoming changes in retailing. If Kroger can successfully enter the electronics market in a reasonable amount of time, it can not only reduce its costs of operation, but also get a jumpstart on potential profits to be made as consumers shift their preferences in the next few years. If Kroger succeeds in shifting its operating model towards the future as its Restock Kroger plan intends to do, then Kroger should be able to finance the short-term costs of these recommendations in a few years and also lay a new foundation for the company’s future.

Appendices
Appendix A
2017 Grocery Store Market Share

Derived From (Guattery, 2017)

Appendix B
2016 Leading Supermarkets by Annual Sales

Derived from Statista

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